Natural-gas futures rally, end with a nearly 14% gain

SAN FRANCISCO (MarketWatch) -- Prices for natural-gas futures rallied Monday to close with a nearly 14% gain, recouping last week's loss with cold weather in parts of the U.S. and forecasts for more of the same raising awareness that winter is on the way and demand can quickly eat through record supplies.

At the same time, crude-oil futures closed at a one-week high after key oil producers scheduled a meeting later this week to discuss a possible reduction in output.

"Weather forecasts for the remainder of October and into November have moved sharply colder over the weekend," said Ben Smith, a managing partner at First Enercast Financial.

"This cooler weather should help alleviate some concerns of gas storage levels hitting capacity," he said.

The November contract for natural gas closed up 78.5 cents, or 13.8%, at $6.444 per million British thermal units on the New York Mercantile Exchange.

The contract traded as high as $6.45, its strongest intraday level since last Wednesday. It lost nearly 12% last week.

"The predicted cold snap is a fresh reminder that one should prepare for a potentially harsh winter," said John Person, president of National Futures Advisory Service.

"If Mother Nature delivers what the Farmers' Almanac predicts as an unusually cold winter, then consumers will need to take measures to prepare to better winterize their homes or brace themselves for higher home and business heating bills," he said. See the Farmers almanac prediction.

Person expects natural-gas prices to climb back above the $10 mark by mid-January "and if there are any corrections between today's prices and a low $5.60, I see that as a tremendous buying opportunity," he said.

Still, last week's forecast from the National Oceanic and Atmospheric Administration, part of the U.S. Commerce Department, said most of the country will see winter temperatures above normal, though this still would be slightly cooler than last year's "very warm" winter. See the NOAA forecast.

Over the weekend, "temperatures throughout the high-consumption regions dipped close to freezing levels," said John Kilduff, an analyst at Fimat USA, said in a note to clients. But conditions are forecast to improve by the middle of this week with mostly seasonal temperatures, he said.

Traders "shouldn't expect much from the temporary heat load," he said, noting that "a few days of intemperate weather won't go too far toward eating into the 3.389 [trillion cubic feet] currently stored -- a record for this time of year."

For now, however, the recent cold weather and likely higher demand for natural gas "will be reflected in this week's storage report," he said. The Energy Department will issue an update on natural-gas supplies in storage on Thursday.

Crude ends at one-week high

Crude-oil futures touched $60 a barrel Monday after members of the Organization of the Petroleum Exporting Countries said they'll hold a special meeting in Qatar to discuss ways to halt the recent slide in oil prices.

The news appeared to offset the adjustment that the cartel made to its 2006 outlook, which effectively reduced its projection for world-oil demand.

Crude for November delivery closed up $1.37, or 2.3%, at $59.94 a barrel after reaching a high of $60. The contract hasn't traded above $60 since Oct. 9. The benchmark contract closed more than 1% higher on Friday, but it lost 2% for last week.

Also on Nymex, November unleaded gasoline futures closed up 2.33 cents at $1.4917 a gallon, while November heating oil rose by 3.87 cents at $1.7565 a gallon.

"There are several factors at work" in the oil market, said James Williams, an economist at WTRG Economics, including lower demand growth, higher non-OPEC production growth and high inventories relative to consumption.

If OPEC cuts supply, that would increase spare production capacity, and it's important to note that the lack of spare capacity has been the primary driver in the market for the last three years, he said.

Given all that, "this market could go up on the news of a production cut and drop later on the realization of enough spare capacity," he warned.

At the same time, the United Nations Security Council voted Saturday on sanctions against North Korea in response to its nuclear activities, though North Korea rejected the move and its ambassador walked out of the Security Council, later criticizing the move as "gangster-like."

The "weekend's debate over sanctions against North Korea can only serve to remind that potential troubles surrounding Iran's nuclear ambitions are only just offstage and could move again to center stage at any moment," Kilduff told clients.

"Until it does, or until OPEC's unity strengthens, the market appears roughly balanced."

OPEC has watched as oil prices have fallen from a high of close to $78 a barrel in mid-July to below $60. The sharp pullback has come as U.S. inventories have steadily climbed to well above their average levels for the time of year and as concerns over the potential for disruptions to output from the Middle East have eased.

"If OPEC is going to stop the fall in price, then they have to show they can get their act together," said Phil Flynn, a senior analyst at Alaron Trading.

Against this backdrop, the cartel used its October monthly report to cut its forecast for this year's world oil demand by 100,000 barrels a day.

"Warm weather, higher oil prices and the relatively-lower natural-gas prices affected oil demand mostly in the OECD countries," the report said, referring to the Organization for Economic Cooperation and Development, a group of industrialized countries. OPEC's now forecasting global oil demand to rise 1.2% to average 84.2 million barrels a day in 2006.

Oil producers left their forecast for 2007 unchanged at growth of 1.5%. "China and the Middle East will lead the world-oil demand growth with 0.42 mb/d and 0.30 mb/d respectively," OPEC's report said. See the full report.

In equities, benchmarks tracking stocks in the oil and gas sectors rose, with the Oil Service Index
OSX, -1.06%
scoring the biggest gains. See Energy Stocks.

And in Monday's metals trading, gold futures closed at a two-week high. See Metals Stocks.

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